A welcome increase in the Fed discount rate

The short-term impact is negative, but a start has to be made towards making money more expensive

IT’S strange how markets react sometimes. The short-term, knee-jerk, downward reaction is often difficult to understand even when the long-term benefits are obvious, and events signal the start of normalisation of very unusual and adverse circumstances.

But it is likely that the stock market’s adverse reaction to the increase by the US Federal Reserve of its key discount rate by a quarter of a percentage point to 0.75% will be short-lived.

At the same time, it is also clear that stock markets may not see the kind of gains seen in 2009 when prices went up by about a half after the collapse of share prices in late 2008 following the world’s most serious financial crisis since the Great Depression of the 1930s.

Two things happened to the markets – stock prices headed south while the US dollar headed north. That is the right way to go purely from a short-term point of view and it likely reflects that although the Fed’s move was expected, it came a bit sooner than the market expected.

Higher interest rates – and this move by the Fed without a doubt presages that – mean that investors will demand a higher rate of return from their holdings. That implies that stocks and bonds will have to fall accordingly.

On the currency side, it implies that holdings of US dollar assets will soon enough get higher interest rates. Accordingly, the US dollar rose to a nine-month high against the euro.

But these are short-term effects. The trillions of US dollars that have been injected into the US and other economies and the loose monetary policies followed all imply that at some time, inflation will become a serious concern.

Easy, cheap money helps to turn an ailing economy around and boosts confidence but prolonging it can be dangerous. That the Fed sees it fit to change its stance now is positive because it must feel that the threats to the system have been largely diffused.

Even so, it is too early to pop the champagne and bring out the glasses. It’s a long walk out of the woods and the way is fraught with unseen hurdles and obstacles. The weather can change in a thrice and the path can get slippery. It calls for a lot of good, careful footwork.

For us in Malaysia, one must reasonably expect that interest rates will begin a slow climb upwards as well. The economy is recovering, the fiscal stimulus measures have bitten and growth is on the cards again.

Our economic problems were not anywhere near as serious as those in developed countries affected by the world financial crisis but we have our own set of problems and we need to work our own solutions to these – and fast.

The world does not stand still and once it sorts out its problems – and it is well on the way to doing it – it will continue its inexorable march onwards. We simply cannot afford to be left behind.

Eyes are focused on what new trick we can conjure up to bring forth a flourish of growth and opportunities to push incomes up for all of us. It will be interesting to see how much structural change will be made to the broad economy.

The march towards normalisation of the world economy, which has started, puts more pressure on us to put our house in order. Nothing less than radical change is required to make the necessary impact.

● Managing editor P. Gunasegaram believes in the old, paradoxical saying that change is the only constant or is it the only constant is change? Never mind, they mean the same.

Building Fit Minds Under Stress

ScienceDaily (Feb. 17, 2010) — A University of Pennsylvania-led study in which training was provided to a high-stress U.S. military group preparing for deployment to Iraq has demonstrated a positive link between mindfulness training, or MT, and improvements in mood and working memory. Mindfulness is the ability to be aware and attentive of the present moment without emotional reactivity or volatility.

 The study found that the more time participants spent engaging in daily mindfulness exercises the better their mood and working memory, the cognitive term for complex thought, problem solving and cognitive control of emotions. The study also suggests that sufficient MT practice may protect against functional impairments associated with high-stress challenges that require a tremendous amount of cognitive control, self-awareness, situational awareness and emotional regulation.

To study the protective effects of mindfulness training on psychological health in individuals about to experience extreme stress, cognitive neuroscientist Amishi Jha of the Department of Psychology and Center for Cognitive Neuroscience at Penn and Elizabeth A. Stanley of Georgetown University provided mindfulness training for the first time to U.S. Marines before deployment. Jha and her research team investigated working memory capacity and affective experience in individuals participating in a training program developed and delivered by Stanley, a former U.S. Army officer and security-studies professor with extensive experience in mindfulness techniques.

The program, called Mindfulness-based Mind Fitness Training (MMFT™), aims to cultivate greater psychological resilience or "mental armor" by bolstering mindfulness.

The program covered topics of central relevance to the Marines, such as integrating skills to manage stress reactions, increase their resilience to future stressors and improve their unit's mission effectiveness. Thus, the program blended mindfulness skills training with concrete applications for the operational environment and information and skills about stress, trauma and resilience in the body.

The program emphasized integrating mindfulness exercises, like focused attention on the breath and mindful movement, into pre-deployment training. These mindfulness skills were to regulate symptoms in the body and mind following an experience of extreme stress. The importance of regularly engaging in mindfulness exercises was also emphasized.

"Our findings suggest that, just as daily physical exercise leads to physical fitness, engaging in mindfulness exercises on a regular basis may improve mind-fitness," Jha said. "Working memory is an important feature of mind-fitness. Not only does it safeguard against distraction and emotional reactivity, but it also provides a mental workspace to ensure quick-and-considered decisions and action plans. Building mind-fitness with mindfulness training may help anyone who must maintain peak performance in the face of extremely stressful circumstances, from first responders, relief workers and trauma surgeons, to professional and Olympic athletes."

Study participants included two military cohorts of 48 male participants with a mean age of 25 recruited from a detachment of Marine reservists during the high-stress pre-deployment interval and provided MT to one group of 31, leaving 17 Marines in a second group without training as a control. The MT group attended an eight-week course and logged the amount of out-of-class time they spent practicing formal exercises. The effect of the course on working memory was evaluated using the Operation Span Task, whereas the impact on positive and negative affect was evaluated using the Positive and Negative Affect Schedule, or PANAS.

The Positive Affect scale reflects the extent to which a person feels enthusiastic, active and alert. The Negative Affect scale reflects unpleasant mood states, such as anger, disgust and fear. Working memory capacity degraded and negative mood increased over time in the control group. A similar pattern was observed in those who spent little time engaging in mindfulness exercises within the MMFT group. Yet, capacity increased and negative mood decreased in those with high practice time over the eight weeks.

The study findings are in line with prior research on Mindfulness Based Stress Reduction, or MBSR, programs and suggest that MMFT may provide "psychological prophylaxis," or protection from cognitive and emotional disturbances, even among high-stress cohorts such as members of the military preparing for deployment. Given the high rate of post-traumatic stress disorder and other mental-health disturbances suffered by those returning from war, providing such training prior to deployment may buffer against potential lifelong psychological illness by bolstering working memory capacity.

In the several months prior to a deployment, service members receive intensive training on mission-critical operational skills, physical training and "stress-inoculation" training to habituate them to stressors they may experience during their impending mission. They also must psychologically prepare to leave loved ones and face potentially violent and unpredictable situations during their deployment.

Persistent and intensive demands, such as those experienced during high-stress intervals, have been shown to deplete working memory capacity and lead to cognitive failures and emotional disturbances. The research team hypothesized that MMFT may mitigate these deleterious effects by bolstering working memory capacity.
The study, published in the journal Emotion and also featured in the most recent edition of Joint Force Quarterly, the advisory journal for the Joint Chiefs of Staff, was funded by the John W. Kluge Foundation and the Department of Defense.

Jha was the principal investigator on the project, and Anastasia Kiyonaga, Ling Wong and Lois Gelfand from the Department of Psychology Penn's School of Arts and Sciences comprised her research team.

Stanley is the creator of MMFT and is on the Board of Directors of the Mind Fitness Training Institute, a nonprofit 501(c)(3) established to support the delivery of MMFT.

Scientist Finds PageRank-Type Algorithm from the 1940s

Google's PageRank algorithm was developed in 1998. But a project to trace the history of such algorithms reveals an example from the 1940s.

The PageRank algorithm is a key part of Google's method of ranking web pages in search results. It uses the network of links between web pages to determine their value and, famously, judges a page to be important if it is linked to by other important pages.

One crucial feature of this idea is that it requires an iterative approach to constantly re-evaluate the value of a page as the importance of others varies. Iterative ranking algorithms have since become an important part of network theory.

PageRank was developed in 1998 by Google's founders Sergey Brin and Larry Page and its impact has been such that it's easy to forget that the approach was not entirely novel. Massimo Franceschet at the University of Udine in Italy points out that the idea has been successfully exploited a number of times in 20th century science, even before Brin and Page were born. Today, he presents a short history of iterative ranking algorithms and charts their evolution prior to Google's emergence.

He begins in reverse chronological order with the work of Jon Kleinberg, a computer scientist at Cornell University, who developed an almost identical approach to PageRank, just a few years earlier. Brin and Page even reference his work in their famous paper introducing PageRank.

Kleinberg called his algorithm Hypertext Induced Topic Search or HITS and it treated web pages as "hubs" and "authorities". It used the circular definition that authorities are pages that are pointed to by hubs and hubs are pages that point to authorities and requires an iterative approach to solve.

In the heady days of the dotcom boom in the late 20th century, before Google became so successful, Kleinberg's work received considerable media coverage.

Franceschet also examines the work of Gabriel Pinski and Francis Narin who developed a way of ranking journals. Their rule was that a journal is important if it is cited by other important journals. Like PageRank and HITS, this requires an iterative method to exploit the structure of links between journals to come up with a ranking.

Long before this, however, Charles H Hubbell at the University of Califronia , Santa Barbara, was analysing social networks in a similar way. In 1965, he published a technique for determining the importance of individuals based on the importance of the people who endorse them. This again has the characteristic circular definition and iterative solution. Hubbell is acknowledged by many including Kleinberg as a pioneer in iterative ranking theory.

But the big surprise is Franceschet's discovery of an even earlier forerunner to PageRank in the work of the Harvard economist Wassily Leontief. In 1941, Leontief published a paper in which he divides a country's economy into sectors that both supply and receive resources from each other, although not in equal measure. One important question is: what is the value of each sector when they are so tightly integrated? Leontief's answer was to develop an iterative method of valuing each sector based on the importance of the sectors that supply it. Sound familiar? In 1973, Leontief was awarded the Nobel Prize in economics for this work.

What's clear is that the ideas behind PageRank have a venerable history but the surprise is that they date back to at least the 1940s. It'll be interesting to see if anybody can find any similar work that predates this.

Ref:arxiv.org/abs/1002.2858: PageRank: Stand On The Shoulders Of Giants